Working to Keep National Politics Out of State's Pension-Fund Investments

Offered a chance to put wider restrictions in place, NJ State Investment Council says it will first look to tightening current regulations

New Jersey’s public-employee pension system will invest up to $100 million in a private-equity firm whose chairman gave more than $2 million to a national political group Gov. Chris Christie ran last year, even as the panel that oversees the nearly $80 billion pension system is revisiting regulations that restrict the political contributions that outside managers can make.

To prevent political interference, state rules ban the investment of pension funds in firms if their "investment management professionals" have made political contributions to state candidates or political committees within two years of an investment.

But as national political organizations and other outside groups have begun playing bigger roles in recent New Jersey elections, state lawmakers want to see wider restrictions put in place.

Members of the New Jersey State Investment Council did not fully embrace those rule changes, but said during their public meeting yesterday they would take a new look at and possibly tighten existing regulations.

For much of the past year, the council has faced questions about whether politics is playing a role in investment decisions. And those questions -- strongly denied by council leaders -- have been raised while Christie, a Republican exploring a run for U.S. president in 2016, has become a national figure and prolific political fundraiser.

This just adds to the pension controversy, since the governor has also pursued a series of changes to public-employee pensions, putting him in conflict with the workers’ unions.

The proposed stake in Denver-based KSL Capital Partners IV that came before the panel yesterday will total up to $100 million, seeking profits for the pension system from the equity fund’s investments in travel and leisure properties.

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But a recent International Business Times report raised the issue of pay-to-play. It cited federal Internal Revenue Service records that indicate Michael Shannon, the chairman and co-founder of KSL Capital, and his wife Mary Sue contributed a combined $2.5 million to the Republican Governors Association in 2013 and 2014.

Last year, Christie was chairman of the organization, and the year before it supported his successful reelection campaign.

Those contributions made KSL Capital the sixth-largest contributor to the Republican Governors Association in 2014, according to the Open Secrets website.

Right now, outside pension-fund managers face the restrictions on making campaign contributions to candidates and political committees in New Jersey, but those rules do not apply to national organizations like the Republican Governors Association and the Democratic Governors Association.

Instead, those groups are registered under Internal Revenue Service rules and thus are not subject to the limits on contributions enforced by the New Jersey Election Law Enforcement Commission.

Tom Byrne, the new chairman of the investment council, raised the issue of the Shannon’s donations to the Republican Governors Association yesterday, but also made clear he had no problem with them.

“That certainly does not violate our guidelines in any respect,” said Byrne, a former chairman of the state Democratic Party.

Still, the proposed investment – which was not blocked by the panel yesterday -- sparked a conversation among board members about how the state Division of Investment, a part of the state Department of Treasury that originates the investment of some pension-fund dollars in hedge funds, venture capital, and other private equity, searches for political contributions that could disqualify an investment.

Adam Liebtag, an AFL-CIO union representative who was picked to serve as the panel’s vice chairman yesterday, said maybe the division’s due-diligence process should involve a wider search and a consideration of political contributions that technically fall outside of the state regulations. Those contributions are not included in the state Election Law Enforcement Commission’s database, but would still raise an issue among those concerned about the appearance of political favoritism.

“I think this generates a discussion that this council should probably start to have,” Liebtag said.

It was in January when members of the council were provided with the results of a Treasury audit that looked into another political contribution made by someone with ties to a pension-fund investment. That audit found Charlie Baker, a Republican who was elected governor of Massachusetts last year, did not violate state regulations by donating $10,000 to the New Jersey Republican Party in 2011,

That contribution came the same year New Jersey’s pension system began a $15 million investment in Boston-based General Catalyst, a firm that listed Baker as an executive in residence.

But the Treasury audit determined that Baker in 2011 was not an investment management professional affiliated with the firm's fund that the pension system was invested in.

The stake in General Catalyst has since been sold at a profit.

During the meeting yesterday, several members of the council said it should revisit the definitions in the current regulations in a bid to tighten up the language and make the rules clearer. Right now, the regulations rely heavily on firms to “self report” those investment management professionals who are subject to the political-contribution restrictions.

But the council members did not endorse the changes that are in a bill lawmakers sent Christie earlier this year, lawmakers are now considering, including widening the prohibition on political contributions to include outside groups like the Republican Governors Association and Democratic Governors Association, as well as the Republican National Committee and the Democratic National Committee.

Byrne said such a policy change could force the pension system to get rid of some of its most successful assets.

“Something that is too broad would cause us to probably liquidate a lot of our private-equity portfolio,” he said.

And when asked after the meeting if Christie had ever asked him to consider a specific investment or equity fund, Byrne replied: “Never.” He also said the last time the two men spoke was likely at a Princeton University football game over a year ago.

When reached for comment later yesterday, KSL Capital spokeswoman Julie Messing-Paea said the couple’s contributions “have never been solicited by Gov. Christie nor anyone acting on his behalf.”

“Further, the Shannon’s contributions to the RGA were specifically restricted to avoid any political contributions to, or independent expenditures in support of, any candidates for state office,” Messing-Paea said.

Joseph Perone, a spokesman for the Department of Treasury, said “any insinuations that politics are in any way involved in investment decisions are completely baseless.”

“Investment decisions are made by career Division of Investment professionals solely on the merits of those investments, performance of the proposed fund, and its fit within the division's broader portfolio,” Perone said.

Also during yesterday’s meeting, the council reviewed the investment strategy it is considering for the fiscal year that begins July 1. Chris McDonough, the director of the Division of Investment, said interest rates are likely to go up in the next fiscal year and part of the plan is to scale back U.S. Treasury allocations, but at the same time boost investments in global diversified credit.

In all, the plan calls for higher returns than the current fiscal year, but less volatility and a better risk-adjusted return ratio.

The council isn’t expected to take action on the plan until its meeting in May, but Byrne said a subcommittee of the panel was very comfortable with the plan after closely reviewing it.

“There’s no magic or pure science to this,” Byrne said. “There’s no guarantee in any of these numbers, but it is the product of the good thinking that we can get out arms around.”

And right now, the investment plan does not contemplate any of the changes associated with the sweeping pension system reforms that Christie put forward last month while presenting his proposed $33.8 billion budget for the next fiscal year. Christie has called for a freezing of the current pension system and the creation of a new retirement plan with features of a 401(k).

He also wants public employees to accept less-generous health plans and use the savings to help pay off the current pension system’s debt, which ranges between $37 billion and $83 billion depending on which accounting standards are applied.

So far, however, his proposal has not been embraced by public-employee unions or Democratic legislative leaders.

“Until further notice, we ought to just continue doing what we’re doing,” said Byrne, who served on a commission of experts whose report to Christie included the proposals he is now pitching.